Facebook, Apple, Amazon, Netflix, and Google (of parent company Alphabet) — ten years ago, we could barely imagine the extent to which these behemoths would dominate our lives and the stock market. Now, these five companies have grown so large and powerful, they are deeply enmeshed in our everyday existence. And, some say this small handful of companies has provided much of the power behind the market over the past few years. Do they exert an outsized force on the stock market, and what does that mean for investors?

Undoubtedly, FAANG stocks have been some of the best performing tech stocks of the past several years. Since 2012, Netflix is up 987.8% and Facebook is up 687.7% (as of 12/31/2017). Since becoming a public company, Alphabet has gained 1,985.3% (as of 12/31/17). And Amazon, incredibly, has returned 23,192% over the past 20 years (ending 2017). Apple is close to becoming the first $1 trillion U.S. company. The FAANG stocks are not like the tech bubble, however, in which valuations skyrocketed with nothing much to back them up. It could be argued that the FAANG companies have the earnings and growth prospects to justify their high stock prices, but how sustainable is the growth priced into them? They are already dominating their respective fields. Whereas the barriers to entry may prevent the rise of new competitors, these giants are beginning to step on one another’s toes! Amazon’s streaming services and Google’s YouTube are in competition with Netflix. And Amazon, Apple, and Google are competing with one another in the area of digital assistant technology with Alexa, Siri, and Google Assistant, as well as with their voice-controlled in-home speakers Amazon Echo, Apple HomePod, and Google Home. Sustainable growth in these companies will likely rely on developing entirely new technologies.

The main question, though, is: are the FAANG stocks too big? Some government regulators have expressed concern at how prominent and powerful these companies have become. And consumers have been faced with the privacy concerns of just a few companies controlling huge amounts of our personal data and how they use it. For investors, there’s also the impact they have on the stock market which may be concerning. Collectively, the FAANG stocks make up more than 12% of the S&P 500 Index (as of June 6, 2018). Their high rankings in the S&P 500 mean that they have a greater effect on the value of the Index than many other companies. In other words—when the FAANG stocks move, the market moves.

There are a few implications investors should recognize when it comes to the FAANG phenomenon. For passive investors in U.S. large cap, it’s important to realize how significant the FAANG stocks are as part of the S&P 500, and how much market performance hinges on these companies. But all investors should be aware of the concentration of the market — not just with FAANG stocks, but in general. The overall decrease in publicly traded companies (the number of U.S. stocks has decreased from 8,025 in 1996 to only 3,492 in 2017, a 56% reduction) means that the large companies still on the market have become more influential to the market as a whole, demonstrated perfectly by the FAANG phenomenon.

This is a fundamental change in the structure and nature of the U.S. public stock market, and domestic public equity investors should take these issues into account in portfolio construction. Greater portfolio diversification may have to come from alternative places like international and global stocks, alternatives, and private equity. Watch our video, Stand Out From the Crowd, to learn more about Arnerich Massena’s solutions to crowded and concentrated public markets.